Inflation sizzles to 9.4% but bank savings deals are put on ice

Inflation has risen again to another multi-decade high. With interest rates also on the increase, Alice Guy looks at how banks are slow to pass on rate rises to long-suffering customers.

This morning, the latest ONS inflation figures confirm that searing inflation hit 9.4% in June 2022, its highest level for 40 years and up from 9.1% in May.

It’s a bleak picture for consumers as wages lag behind price increases and many families struggle with everyday costs. And there’s no current relief in sight as energy costs are expected to rise further in the autumn, pushing inflation as high as 11%. This sky-high inflation is largely driven by rising fuel, energy and food costs, with transport costs up an eye-watering 15.2% in the year up to June 2022.

If you’re a saver, then inflation is eroding the value of your money in real terms, and you’re probably looking for the best interest-rate deals for your cash savings.

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Cash deals lag behind base rate

For savers, the good news is that interest rates are finally rising for the first time in years, but recent research shows that the banks are slow in passing on those increases to consumers.

Despite rising interest rates, analysis this week from Moneyfacts shows that only 51% of the savings market is currently beating the Bank of England base rate (currently 1.25%). In fact, the number of base-rate beating deals has fallen since the start of December 2021 when 79% of easy access deals outstripped the 0.1% base rate.

Rachel Springall, Finance Expert at Moneyfacts, said: “Interest rates have risen across the savings spectrum for a fifth consecutive month, promising signs for savers who either want some flexibility or a guaranteed return on their cash. It has been over six months since the first of five base rate rises were announced, and while rate competition among many savings providers has been prevalent, just 51% of the savings market pays above 1.25%, the current Bank of England base rate.

"The market clearly has more room for growth but, as we have seen in the past, a base rate rise does not always get passed on to consumers. However, it should encourage savers to compare deals and switch.”

Medium-term savers, who don’t need their cash for a while could have a few other options including fixed interest accounts and one-year fixed bonds. According to Springer, fixed bonds are, “an area of the savings market which has improved enormously. Since the start of 2022, the average one-year fixed bond rate has more than doubled, up from 0.80% to 1.75%, largely fuelled by competition among challenger banks...Savers coming off a one-year bond wanting to fix for an equivalent bond could earn 1.23% more on average today (1.75%) than what was available 12 months ago (0.52%).”

And those interest rates could be due to rise further.

Other options for savers

Alternatively, there are increasingly attractive money market products and bond funds offering yields that are starting to look tempting again.

As interactive investor's bond expert Sam Benstead said recently: "Investors can now get about 4% from the safest corporate credit, known as investment grade, while high-yield or “junk” bonds yield just under double that."

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The Bank of England monetary policy committee is due to meet again on 4 August to discuss the current base rate and it is widely expected that it will rise again. It’s one of the few tools policymakers have at their disposal to try and control runaway inflation.